IRS official contradicts claims about reviews

By STEPHEN OHLEMACHER , Associated Press

Jun. 17, 20131:00 PM ET

WASHINGTON (AP) — Internal Revenue Service officials in Washington scrutinized the very first application from a tea party group seeking tax-exempt status — and dozens of others, including some requests that languished for more than a year without action, an IRS official has told congressional investigators.

Susan Walsh

FILE - This March 22, 2013 file photo shows the exterior of the Internal Revenue Service building in Washington. The Internal Revenue Service is about to pay $70 million in employee bonuses despite an Obama administration directive to cancel discretionary bonuses because of automatic spending cuts enacted this year, according to a GOP senator. (AP Photo/Susan Walsh, File)

FILE - This March 22, 2013 file photo shows the exterior of the Internal Revenue Service building in Washington. The Internal Revenue Service is about to pay $70 million in employee bonuses despite an Obama administration directive to cancel discretionary bonuses because of automatic spending cuts enacted this year, according to a GOP senator. (AP Photo/Susan Walsh, File)

Holly Paz, who until recently was a top deputy in the division that handles applications for tax-exempt status, told congressional investigators she reviewed 20 to 30 applications after learning that field agents had stopped working on them. Her assertions contradict initial claims by the agency that a small group of agents working in an office in Cincinnati were solely responsible for mishandling the applications.

Paz, however, provided no evidence that senior IRS officials ordered agents to target conservative groups or that anyone in the Obama administration outside the IRS was involved.

Instead, Paz described an agency in which IRS supervisors in Washington worked closely with agents in the field but didn't fully understand what those agents were doing. Paz said agents in Cincinnati openly talked about handling "tea party" cases, but she thought the term was merely shorthand for all applications from groups that were politically active — conservative and liberal.

Paz said dozens of tea party applications sat untouched for more than a year while field agents waited for guidance from Washington on how to handle them. At the time, she said, Washington officials thought the agents in Cincinnati were processing the cases.

Paz was among the first IRS employees to be interviewed as part of a joint investigation by the House Oversight and Government Reform Committee and the House Ways and Means Committee.

Congressional investigators have interviewed at least six IRS employees as part of their inquiry. The Associated Press has reviewed transcripts from three interviews — with Paz and with two agents, Gary Muthert and Elizabeth Hofacre, from the Cincinnati office.

The IRS declined comment for this story.

Republican and Democratic staffers are working together on the investigation. Nevertheless, it is starting to take on a partisan tone.

Rep. Elijah Cummings, D-Md., accused the Republican chairman of the House oversight committee of selectively leaking transcripts of the interviews. Cummings is the ranking Democrat on the committee and Rep. Darrell Issa, R-Calif., is the chairman.

"Another week, another leak from chairman Issa of cherry-picked excerpts that show no White House involvement whatsoever in the identification and screening of these cases," Cumming said. "By leaking transcript portions that omit key details from the accounts witnesses provided to the committee, chairman Issa has now drawn condemnation even from House Republicans working with him on this very investigation."

Last week, Cummings released excerpts from an interview with an IRS manager in Cincinnati who said that he set the review of tea party applications in motion. Cummings said the manager, who was not identified, confirmed that the White House was not involved.

Cummings has called for all of the transcripts to be released but Issa said that would be reckless while the investigation is ongoing. Issa said limited releases of testimony may empower other witnesses to come forward.

A yearlong audit by the agency's inspector general found that IRS agents had improperly targeted conservative political groups for additional and sometimes onerous scrutiny when those groups applied for tax-exempt status.

The IRS watchdog blamed ineffective management by senior IRS officials for allowing it to continue for nearly two years during the 2010 and 2012 elections.

Since the revelations became public last month, much of the agency's leadership has been replaced and the Justice Department has started a criminal investigation. Both Paz and her supervisor, Lois Lerner, who headed the division that handles applications for tax-exempt status, have been replaced.

Agency officials told congressional aides that Lerner was placed on administrative leave. They did not disclose the status of Paz, other than to say she was replaced June 7.

Lerner is the IRS official who first disclosed the targeting at a legal conference May 10. That day, she told The AP: "It's the line people that did it without talking to managers. They're IRS workers, they're revenue agents."

On May 22 — the day after Paz was interviewed by investigators — Lerner refused to answer questions from lawmakers at a congressional hearing, citing her Fifth Amendment right not to incriminate herself.

Paz told congressional investigators that an IRS agent in Cincinnati flagged the first tea party case in February 2010. The agent forwarded the application to a manager because it appeared to be politically sensitive, Paz said. The manager informed Paz, who said she had the application assigned to a legal expert in Washington.

At the time, Paz headed a technical unit in Washington that provided guidance to agents who screened applications for tax-exempt status. The agents worked primarily in Cincinnati. One of their tasks was to determine the applicant groups' level of political activity.

IRS regulations say tax-exempt social welfare organizations may engage in some political activity but their primary mission cannot be influencing the outcome of elections. It is up to the IRS to make that determination.

"Oftentimes what we will do, and what we did here, is we'll transfer it to (the technical unit), get someone who's well-versed on that area of the law working the case so they can see what the issues are," Paz said. "The goal with that is ultimately to develop some guidance or a tool that can be given to folks in (the Cincinnati office) to help them in working the cases themselves."

By the fall of 2010, the legal expert in Washington, Carter Hull, was working on about 40 applications, Paz said. A little more than half had "tea party" in the name, she said.

IRS agents in Cincinnati were singling out groups for extra scrutiny if their applications included the words "tea party," ''patriots" or "9-12 project," according to the inspector general's report. Paz said she didn't learn that agents were targeting groups based on those terms until June 2011, about the time Lerner first ordered agents to change the criteria.

Paz said an IRS supervisor in Cincinnati had commonly referred to the applications as "tea party" cases. But, Paz said, she thought that was simply shorthand for any application that included political activity.

"Since the first case that came up to Washington happened to have that name, it appeared to me that's why they were calling it that as a shorthand," Paz told congressional investigators.

Paz said she didn't think the agents in Cincinnati were politically motivated.

"Many of these employees have been with the IRS for decades and were used to a world where how they talked about things internally was not something that would be public or that anyone would be interested in," Paz said. "So I don't think they thought much about how it would appear to others. They knew what they meant and that was sort of good enough for them."

WASHINGTON (AP) — Internal Revenue Service officials in Washington scrutinized the very first application from a tea party group seeking tax-exempt status — and dozens of others, including some requests that languished for more than a year without action, an IRS official has told congressional investigators.